• Reverse Mortgage Explained

  • by Danny McGuffin

A recent stat came across my desk that said that 78% of Senior’s had heard about Reverse Mortgages. Since the program is still relatively new, that figure shocked me, I was assuming it to be around 50%, so the fact that people have heard of the program is pretty telling. So, after being happy that the news was in fact coming out and that people were in fact hearing about the program, I was given another tidbit of information that took all the good feelings away.

Of the 78% of seniors that had heard about the program, only 50% of them understood what the program was about. To put this into numerical terms for you, say we have 1000 seniors and we ask them if they have heard of a Reverse Mortgage, 780 of them would say yes. Of those 780, only 390 of the 1000 seniors actually understood what the program was about. So in essence 39% of seniors understand the program. I know there are a lot of things you can find online about What is a Reverse Mortgage and it is explained in detail. I think the best way to describe what a reverse mortgage is, is to explain it in real world terms like I had to explain to my parents when they found out that I was working in this industry.

Lets assume that you own your home free and clear (you can have a mortgage, but for this explanation, lets go with free and clear as it is the easiest manner to explain the program). You decide to take out a reverse mortgage on your home, much like a traditional mortgage, you are still responsible for paying your property taxes, your HOA fees, and your property insurance. People tend to think that by getting a reverse mortgage, they are getting cash for their home and they can ignore some of the basic principles of home ownership and that is not the case.

If you have held a traditional mortgage on your home, you are still made to pay your insurance, the HOA fees, and property taxes. You are also paying to pay down the mortgage amount which includes interest and principle. On a reverse mortgage, you are basically doing the opposite of that. Instead of paying down the mortgage, you are getting paid from the mortgage, basically increasing the mortgage balance on your home in however you decide to select your proceeds. If it is a lump sum, then you are basically getting a certain percentage of your homes appraised value in a lump sum payment. With a monthly draw, each month, your mortgage amount goes up. With a credit line your mortgage amount goes up on the amount that you have tapped from that credit line. The benefit is that whatever income you are getting normally is yours to use without having to pay a mortgage, you may in some cases depending on if you have a current mortgage that is paid off from the Reverse Mortgage, have additional income from the equity in your home to spend on whatever you please.

Of course this is a very rudimentary explanation. It is always best to discuss a reverse mortgage with a licensed mortgage professional to get exact details, but this was sufficient to explain it to my mother who did not understand the concept until I explained it like I did above.

Danny McGuffin is a writer for Retiring Wise.  Give us a call at (800)401-8114 to talk to one of our licensed professionals. They can discuss your financial situation with you and determine if a reverse mortgage makes sense for you and your financial goals.